How To Create a Budget and a Cash Flow Analysis for Businesses of All Sizes

Mike Owens
Mike Owens
Mike is a problem solver with an eye for financial details. With his leadership skills, Mike has been able to deliver exceptional results for Tentho members, even when working under tight deadlines and against all odds. Mike's Senior Executive Experience speaks volumes about what he can do - from operational efficiency (and its importance) to strategic planning, his guidance will set you up for long-term success.

There’s no getting around budgeting and cash flow forecasting if you want your business to succeed. Whether you’re just getting started or have been in business for many years, budgeting and cash flow forecasting are essential tools to help you understand your past performance, set realistic goals for the future, and make better decisions about how to allocate resources. Regardless of your company size or stage of development, budgeting is a critical exercise for proper financial and operational planning. In this blog post, we’ll discuss the benefits of budgeting for businesses of all sizes – from pre-revenue startups to rapidly growing small businesses to those preparing for an exit.

History is your foundation.

When creating your budget for next year, your historical financials are a crucial starting point. It is important to see the trends of what occurred in prior years and to assess what is different in your business and the economy in the upcoming year. Analyzing what happened last year allows you to get the budget process started, but this is only the beginning of your planning efforts. To really set yourself up for success in the coming year, it’s essential to sit down and have strategic conversations with your team about your goals and how they can be achieved. This may involve evaluating cash flow forecasts, pricing strategies, or other business factors such as staffing needs or service channels. Whatever steps you decide to take, roundtable discussions, and careful planning are key to successfully creating a budget that helps you reach your overarching business goals. 

  • Here are some questions to get the conversation started:
  • What are the 3 primary goals we want to work toward next year?
  • What are your revenue and net profit target?
  • What distributions do you hope to take?
  • Are you ready to take on that expansion you have been talking about?
  • Do we need to hire more people?
  • Do we need to adjust our product pricing?
  • Are there different service channels we should explore?

In order to successfully plan for the future of your small business, it is essential that you utilize open, honest, and direct roundtable discussions. These types of discussions are key to cash flow forecasting and budget planning, as they allow you to gather input from a wide range of stakeholders and gain valuable insights from multiple perspectives. By asking the tough questions and diving deep into small business strategy issues, you can create a robust budget that accurately reflects your company’s unique needs and goals. Ultimately, conducting regular roundtable discussions will help you make informed financial decisions that will set your business up for success in both the short-term and the long-term.

Building a powerful budget for your business.

Now that you have analyzed your historical financials and set your goals for next year, you can start building your monthly budget and making any necessary adjustments. By creating a detailed budget plan, you can gain a clear picture of how your business will operate moving forward, allowing you to make strategic decisions based on concrete data. Additionally, by anticipating different scenarios and developing contingency plans, you can better prepare for unexpected challenges that might arise. Whether it be identifying opportunities to drive revenue in the future or implementing strategies to expand operations, careful cash flow forecasting and smart budget planning are essential for maximizing the success of any small business. With this knowledge, you will feel confident that you are well-equipped to build a successful future for your company.

Conducting a precise cash flow analysis.

When creating or updating a budget, one of the most important steps is to analyze your cash flow. This involves looking at any regular cash payments that you receive throughout the year (annually or quarterly) and estimating how you will use these funds to cover your expenses over different time periods. For example, you might have a large cash inflow around the holiday season that can be used to pay for items like supplies, advertising costs, or employee salaries over several months.

 

In addition to cash inflows, it is also essential to identify and plan for any cash outflows that you typically experience throughout the year. These could include routine business expenses like utility bills, office supplies, or website hosting fees. Additionally, reviewing any annual cash expenditures that are due at specific times of the year can help you identify potential shortfalls or cash flow gaps and better plan ahead. 

 

To maintain financial stability in your business, it is also important to build a reserve of cash (emergency fund) in case of unforeseen circumstances. Ideally, this should be an amount equivalent to at least three months of your average monthly cash outflows. With this level of financial readiness, you can confidently focus on growing your small business strategy without worrying about falling behind on payments or facing other negative outcomes.

Striking the right balance between your budget and cash flow analysis.

Managing your cash flow is an essential component of any successful small business. Whether you are just starting out or are well established, it is important to have a comfortable cash balance that allows you to continue to grow without being limited by cash flow constraints.

 

Now that you have conducted a cash flow analysis for your business and carefully analyzed your cash inflows and outflows, you are ready to start striking the right balance. This part involves speaking with your key team members to determine how best to utilize your cash resources moving forward. Perhaps it may be necessary to get a line-of-credit in order to cover any shortfalls during the lean months. However, you also want to make sure that any borrowing does not hamper your ability to grow and evolve as needed. Ultimately, striking the right cash balance is about thoughtful planning and ongoing strategic alignment across all levels of the organization.

Incorporate a monthly budget to actuals analysis process.

A monthly analysis of your budget to actual is an essential step in managing your business. By taking the time to examine each month’s budget to actual variance, you can quickly identify areas where your spending may be significantly different from your projections. Understanding these variances can help you decide whether the discrepancy is an isolated incident or something that is likely to recur. Additionally, tracking monthly budget performance over the course of the year will allow you to keep with your financial goals. By holding regular meetings to go over the monthly significant budget to actual variances, you can stay on top of any changes and make adjustments as needed. Overall, a rigorous monthly analysis process is key to effectively managing your finances and reaching your economic goals.

Benefit from your budget and cash flow analysis.

For early-stage startups, budgeting can be especially helpful in helping you plan for growth. By budgeting and forecasting your cash flow, you can make sure that you have the right amount of funding at each stage of development to support your growth strategy. This can help you avoid the common pitfalls of running out of cash before reaching profitability.

 

For more established businesses, budgeting can be a crucial tool for making strategic decisions about your operations and products. It allows you to identify areas where you might not be spending enough or too much money, so that you can adjust accordingly and stay on track with your goals. And if there are any major changes in the market or industry landscape, budgeting gives you visibility into how those changes could impact your business model and bottom line.

 

At the end of the day, budgeting is one of the most effective ways to manage risk and increase profitability in your business. So whether you’re just starting out or have been around for a while, don’t neglect budgeting and cash flow forecasting – they are essential tools for success in today’s fast-paced business landscape. So get started today, and reap the rewards of budgeting for years to come!

Related Terms.

Here is a list of common terms associated with a budget and cash flow analysis, that every business owner should know:

  • Cash flow forecasting: Cash flow forecasting is the process of obtaining an estimate or forecast of a company’s future cash balances.
  • Cash flow statements: In financial accounting, a cash flow statement, also known as the statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.
  • Cash on hand: Cash on hand is money yet to be deposited to the bank or cash money kept on hand as a change for customers. 
  • Financial statements: Financial statements are formal records of the financial activities and position of a business, person, or other entity.
  • Working capital: Working capital is a financial metric which represents operating liquidity available to a business, organization, or other entity, including governmental entities. 
  • Fixed expenses: fixed costs, also known as indirect costs or overhead costs, are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be recurring, such as interest or rent being paid per month. These costs also tend to be capital costs.
  • Accounts receivable: money owed to a company by its debtors.
  • Accounts payable: money owed by a company to its creditors.

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